Abstract

Following the economic crisis which resulted in uncertainty of trustees to meet pension obligations, institutional investors are becoming more conscious of investment risks. They risk getting less return than previously forecasted as a result of falling prices in the equity market. In turn to mitigate the risk, the investment strategy of the schemes has been greatly influenced. Pension schemes currently have a tendency to shift their investment strategy from return-seeking to a liability driven strategy. Moreover, researchers have reported that the UK ageing population will grow significantly within the next few years, thus there is an important recognition that pension schemes assets should also be increased considerably to provide sufficient income to meet pension obligations. The main issue for pension schemes investment managers is how to invest their assets to ensure that the funds will be available to pay pension obligations when due.

This paper empirically studies the strategic asset allocation of UK defined benefit occupational pension schemes. It also looks at the factors influencing UK private pension schemes investment decision. The results indicate that funding level, change in market value of equity, liability profile and trustees’ attitude of risks influence asset allocation. Other rationale for schemes asset allocation is explained by factors that are not tested in this research while other causes remain unexplained. Other factors which may influence asset allocation but have not been tested in this research are actuary’s expectations, investment regulations; scheme maturity. Testing whether these factors do have an influence on asset allocation could be an interesting topic for further research.

The results also indicate that wide dispersion exists in the asset allocation. Investment in equity ranges from 15.7% to 87.6% while that of bond varies from 0% to 68%. We found that shifts in asset allocation depend on the market conditions. Prior to the recent financial crisis, pension schemes had more equity exposure than to bond. However, following the economic crisis and the collapse of the stock market most pension schemes investment have underperformed and reported significant deficits. As a consequence pension schemes are shifting their investment into bonds. The results highlight that although defined benefit schemes still form a major part of the UK private pension system they are continuously being closed to be replaced by defined contribution schemes where asset allocation decisions are at the member’s discretion.